A debate is brewing on how to tackle the low level of investment in the UK. With the impending election of Jeremy Corbyn as Labour leader, this could become a key electoral battleground. The UK has suffered from low investment for decades, and it is widely acknowledged this problem can no longer be ignored. Investment is the foundation of economic success, from building infrastructure to developing products and researching new drugs. It is critical that we start investing again.
Firstly, how bad is the problem? The UK has one of the lowest and falling levels of investment in fixed (physical) assets amongst the OECD. This is investment in machines, buildings, and some more intangible items such as software. The UK is even below countries still in the grip of economic crisis such as Italy and Spain.
Gross fixed capital formation as a percentage of GDP (investment in physical assets as a proportion of the economy)
Source: OECD Statistics
However, this is partly due to the UK shifting away from capital intensive industries such as manufacturing, and therefore perhaps this is not a problem? But when we look at investment in R&D (research and development) we see the same picture. The UK has low and falling investment. If we are to succeed in high-tech industries we need to invest in R&D. The contrast is particularly stark against Asian countries such as South Korea, Japan and China.
Expenditure on R&D as a percentage of GDP
Source: OECD Statistics
Why is this? It is partly due to a lack of state investment, though a significant factor is also the low level of business investment. Companies are increasingly returning cash to shareholders through dividends and share buybacks, rather than investing. Furthermore, companies are now in aggregate net savers in our economy, lending money to consumers and the government, so we can buy the goods companies produce. This is a reversal from the founding raison d'etre of companies, which was to be conduits for investment, borrowing money from the public in order to carry out investment.
UK non-financial corporation distribution of profits between investment, cash returned to shareholders (dividends) and borrowing/lending
Source: ONS
Symbolic of this problem is the recent announcement by Taylor Wimpey to return £300m to shareholders, close to 100% of annual profit. It is widely recognised the UK has a housing crisis with too few houses being built. Taylor Wimpey is one of the UK's largest house builders. It is therefore surprising Taylor Wimpey should return cash to shareholders rather than investing in building more homes. Especially given investing in building homes delivers a decent return.
Therefore the UK has a problem that needs solving, but this is nothing new, the UK has suffered from low investment for a long time. Historians even attribute the start of the UK's relative economic decline in the late 19th century to a lack of domestic investment. More recently the UK government commissioned the Kay Review in 2010 to look at short-termism in UK stock markets. The Labour party also published a review in 2013 called "Overcoming Short-termism within British Business".
The lack of investment in the UK is being increasingly recognised by the political parties. The great debate is how we can fix this? The Conservative government recently published its plan called "Fixing the foundations: creating a more prosperous nation". This proposes a combination of £100bn investment in infrastructure, together with tax incentives to encourage businesses to invest. This is the continuation of policies that have delivered steady increases in investment over the last few years. A good start, but more is needed if we are to close the gap that has opened up between the UK and other nations.
Jeremy Corbyn, the frontrunner in the Labour leadership contest, is putting forward a quite distinct solution; a "People's QE". Rather than quantitative easing (QE) by the Bank of England to buy corporate and government bonds, as it did during the financial crisis. He proposes QE is used to directly invest in infrastructure. This is a radical policy, derided by some, lauded by others. Either way, there will be clear blue water between the parties in the great investment debate.
Many view the idea of People's QE as another sign that Corbyn is an unelectable left winger. The Conservative Party cannot believe their luck, and many in the Labour party fear a return to the divisions of the 1980s. Indeed, many of Corbyn's proposed policies do appear to be taken out of the loony bin. However, the coming great debate on investment could be where Corbyn has the most to gain. Challenging the Conservatives on their home turf of business and growth, rather than with populist policies of redistribution could catch the Conservatives off-guard.
While People's QE is a radical policy there is a growing debate around the state's role in driving growth. This is being fuelled by the success of Asian countries such as South Korea, where the state played an active role in business success. Or from the USA where government agency DARPA has played a significant role in driving business innovation, as argued by Mariana Mazzucato in her book Entrepreneurial State. Therefore there is a debate to be fought, and of all the radical policies put forward by Corbyn this may be the one most likely to land a blow.
The Conservatives should not be complacent, assuming Corbyn will return the UK to the politics of the 1980s. In the great investment debate he has an opportunity to put forward a coherent and distinct growth agenda. The Conservative party should pre-empt this by doing more to end decades of under-investment.